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Election year has been a fairly good one so far for the U.S. stock market. Despite the post-election slump, it closed last week up 10.29 per cent, as measured by the total return of the S&P 500 Index in U.S. dollars.

In fact, for all the worries over sluggish economic growth, high unemployment and massive government debt, the U.S. market has yet to have a losing year under the re-elected Democratic incumbent president. The question is: Will 2013, the first year of Barack Obama’s second and final four-year term, snap the winning streak?

In holding office during a market recovery, Obama has had end-date bias in his favour. He took office in January 2009, less than three months before the bottom of the bear market that wiped out about half of the value of U.S. stocks. It was a great buying opportunity. The plunge was so deep that there was mostly nowhere to go but up.

Now that we’re close to four years into a market recovery, caution is in order. For instance, over at AGF Investments Inc., veteran global equity manager Stephen Way is “modestly underweight” the U.S.

Way, whose investment process is mainly about evaluating individual stocks but also involves ranking countries, says he finds U.S. valuations such as price-earnings and price-to-book ratios to be relatively high.

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On a positive note, he likes what he has seen recently in terms of positive earnings momentum. Overall, Way and his team are clearly finding American companies they like, since they recently held 45 per cent of the assets of AGF Global Equity Class in U.S. stocks.

Valuations aside, political wrangling in Washington is casting a cloud on the U.S. market; The uncertainty is centred on the so-called “fiscal cliff.” That is, what will happen if Democrats and Republicans fail to agree on tax hikes and how the U.S. government can finance its debt and pay its bills.

Geoff Stein, a portfolio manager in Boston with Fidelity Investments, says he is pessimistic that U.S. policy-makers will be able to reach an agreement any time soon on a lasting solution to the fiscal crisis.

Stein, who co-manages funds for Canadian investors including Fidelity Global Monthly Income and the newly launched Fidelity U.S. Monthly Income, expects that at best only a partial deal may emerge over the next several months.

“Nevertheless, this process could soften the negative impact on GDP in the near term, compared with the more severe effect of the full cliff that has been estimated,” Stein said in a post-election commentary.

The fiscal crisis, along with a potential new round of quantitative easing by the U.S. Federal Reserve, poses currency risks for Canadian investors in U.S. equities or other U.S.-dollar denominated assets.

Over the short term or even over periods of 10 years or longer, there can be large differences in the performance of hedged versus unhedged funds.

For instance, over the past 10 years ended Oct. 31, the annualized total return of the S&P 500 is 6.9 per cent when expressed in U.S. dollars. In Canadian currency, it’s 2.3 per cent, more than four and a half percentage points lower.

Through investing in funds, individual investors can manage their currency risk. Many fund companies offer a choice between the hedged and unhedged versions of their actively managed funds. Likewise, there are similar choices among index-style exchange-traded funds.

The current low-cost providers of currency-hedged funds that are indexed to the broad U.S. market are the BMO, Horizons and Vanguard families of ETFs, all of which charge a management fee of 0.15 per cent. This fee also covers most operating expenses, though investors must pay brokerage commissions to buy or sell units.

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